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Steel: Sailing in rough water - Views on News from Equitymaster
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  • Jun 18, 2001

    Steel: Sailing in rough water

    With a downturn in the global economy, the steel industry is facing tough times. Global steel consumption, which grew by 5.8% in FY01, is expected to grow 2.3% in the current year. As a result of the demand supply gap in the industry steel prices are on a downhill journey.

    United States, which accounts for around 15% of the world steel consumption, is expected to record a negative growth rate of 0.1% in the current year. Many companies in the US are facing a financial meltdown, which could further pressurize steel prices. After touching a low of US$ 180 per tonne in December, steel prices have bounced back to US$ 210 per tonne. However, the rally has now halted and the prices are unlikely to recover at least in the next six months, as there is an absence of growth in demand.

    According to the World Steel Dynamics (WSD) production of steel is expected to fall by 2% to 829 m tonnes in the current year, as compared to a rise of 7% in the previous year. The decline in production could help steel producers in increasing product prices, particularly for value added steel products.

    In the medium term, pressure on the industry could lead to acceleration in consolidation activity. Usinor of France and Luxembourg’s Arbed have already announced merger plans, as have NKK and Kawasaki, Japan’s second and third largest steel makers.

    On the other hand, sustained demand from the infrastructure segment has resulted in an uptrend in domestic demand for steel. Finished steel production registered an impressive growth of 7.7% to 29.7 m tonnes in FY01. Consumption too rose by about 7%. Steel exports registered a growth of 9.5% despite a global downtrend. While SAIL’s production grew by 7.9%, Tisco’s production was up by 4.9%.

    (Consumption in million metric tonnes) 1999 2000 Change 99-00 2001 Change 00-01
    China 131 137 4.7% 147 7.3%
    Japan 69 74 7.1% 73 -0.7%
    Total Asia 311 332 7.0% 346 4.0%
    US 111 115 3.8% 115 -0.1%
    Australia & NZ 7 6 -6.0% 6 -4.8%
    Africa 15 15 3.4% 16 2.0%
    Middle East 15 16 7.3% 16 1.2%
    World Total 711 752 5.8% 769 2.3%

    Source: IISI

    Fiscal year 2001-02 has started on a dull note for the Indian steel sector. Production has fallen by 1.8% in April 2001. The future outlook is not encouraging as reflected from the sliding growth rates in industrial production. The index of industrial production (IIP) registered a growth of just 2.7% YoY in April ’01 compared to 6.5% recorded in April ’00. The manufacturing sector witnessed a decline in growth rates by 440 basis points to 2.7% in April. The numbers are indicative of the slowing Indian economy, affected by the sluggish world economy. The Indian steel producers could be hit over the next six months, as demand remains at lower levels. However, recovery could come with a rise in domestic construction activity.



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